Published On: Fri, Feb 19th, 2010

Electronic Trading Systems Gain Ground In Asian Equity Markets

Electronic trading systems are capturing a growing share of equity trading volume across the Asian region, according to the results of the latest Greenwich Associates Asian Equity Study.

A combination of volatile markets and a dramatic reduction in the volume of brokerage commission payments on trades of Asian equities caused institutions across the region to alter trading practices last year by reallocating trade flows toward brokers providing consistent coverage and away from firms viewed as financially risky. In another significant change, institutions are increasing the share of their total Asian equity trading volume executed via electronic trades.

The study results reveal that institutional investors in Asia increased the average share of total equity trading volume executed via self-directed electronic trades to 18% last year from 15% in 2007-2008. Portfolio trades made up another 4-5% in both years.

The current 18% share of trading volume executed on electronic systems puts Asian institutions on par to just slightly behind their peers in Japan and Europe in terms of electronic trading. Electronic trading systems capture 20% of trading volume in Japanese and European equities. Electronic trading volumes in all three markets lag those in the United States, where institutions execute 35% of domestic equity trading volumes electronically.

The growth in electronic trading has decreased the share of institutions’ Asian equity trades executed through traditional, full-service trades facilitated by broker sales-traders to 78% of total volume from 80% in 2008.

“Although it’s taking place gradually, the adoption of electronic trading by Asian institutions will have a significant impact on the equity trading business here,” says John Feng. “By 2012, Asian institutions expect to reduce ‘high touch’ trading to 68% of total equity trading volumes, with self-directed electronic volume growing to 28% and portfolio trading holding fast at 4-5%.”

Electronic Trading Growth Pushes Trade Commissions Lower
While growing use of “low touch” execution is driving down blended commission rate in Asia, there are clear signs that rates on high touch trades are also declining for equities from Hong Kong, Taiwan, Korea, and India last year, while remaining flat for stocks from Singapore. After these reductions average rates across the region ranged from 19-26 basis points. Meanwhile, average rates on agency portfolio trades held steady at 10 bps and average rates on self-directed electronic trades were stable at 6 bps.

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